1.1 Background to the Study
Profits are one of the key elements in the cyclical growth of economics because of the effect they have on investment and saving behavior and therefore on capacity, productivity and competitiveness. The evolution of profits and relative income shares gives information about the cash flow positions of firms, which may affect business environment. There is a close link between the profit shares which is defined as the ratio of non-financial gross operating surplus to output and investment, defined as the ratio of gross private investment to output. Most of the turning points in the investment ratio coincide with or are proceeded by turning point in the profit ratio. It is argued that this close link suggest that the decline in the profit share may be important determinant of change in investment.
Current literature offers surprisingly few studies of profit rates. A large body of literature is devoted to the study of “pricing to market”, which encompasses price discrimination across destination markets, the “pass through” effect, but does not address the feedback to profit. Another approach is to analyze a related concept, the rate of return, defined as the ratio of the gross operating surplus to the replacement value of capital.
Although the concept of the rate of return is more relevant for investment purpose, problems in measuring the stock of capital across countries make international comparison difficult and ambiguous. Moreover, in the short run, the capital output ratio typically does not change significantly. Therefore, several analysis use the rti of profit to GNP with validity in profitability measures defined as the ratio of gross operating surplus to nominal profit.
Following Clarinda model of pricing-to-market to analyze profit. However, the analysis explicitly models imported inputs and alternative definition of relative prices, and test their significance in determinant of profits. It turns out that the impact of these costs often substantially higher than that of relative prices or exchange rate factors that have attracted much attention in the past.
Profit, in effect, is a simple residual concept but its level is determined by the complex interaction of a multitude of factors, the typical form profit (denote by p) in a simple competitive market model is defined by p = TR – W. N-P.K where: TR = Is the total revenue (or total sales of the firm). The firm’s costs are represented by the wage will (wage rate, time; the work-force, N of the firm) and the cost of capital (the rental cost of capital, p multiplied the capital stock of the firm K0.
According to Sargent, the rental or user cost of capital is equal to the interest rate on government bonds plus the depreciation rate minus the expected rate of increase in the price of new capital goods.
According to corporate finance theory that in order for investment in fixed capital to be profitable, the rate of return should at least be equal to the cost of borrowing fund to finance the investment plus a charge for depreciation. In other words, if the initial cost of the investment undertaking is greater than the present value of expected future returns on the investment (i.e. the net present value is negative), then the firm should not proceed with the investment. If the net present value of available investment project is positive, then in a world without capital rationing, the firms should continue to invest in project until, at the margin, the firms is indifferent between the investment and the purchase of a government bond. Ultimately, the rate of accumulation of new capital (i.e. level of investment depends on the gap between the rate of return on capital and the cost of capital.
Tobin the ratio of the stock market valuation of the firm to the net of tax replacement cost of the firm existing capital. A low value of q suggest that corporate profitability is insufficient to stimulate capital investment, firm tend to prefer the acquisition of existing form rather than expand fixed investment. A high q value implied an incentive for firms to accumulate new capital goods, for shareholder to invest in the shares of the company and earn a profit when investment is financed through equity issues Sargent Tobin’s q for Nigeria manufacturing industry using this measure will be discussed, the relationship between profit and investment the level for Nigeria.
According to Pecking order theory, firm having high profit tend to attain low debt profile because when firms are more profitable, the first priority is to generate financing through returned earnings because they can maximize the value of the existing shareholder if retain earnings is preferred because it almost has no cost, but if the external resources are used for financing like very high cost. The packing order theory is as a result of information asymmetric existing between insider of the firm and the outsider. The firm being a service industry has no other option but to mobilize both short term and long term funds to run both its lending and investment activities.
1.2 Statement of the Problem
The prime objective of every business organization is profit maximization. A major problem facing companies in Nigeria is the growing trend of input cost and high rate of taxes which erodes business profit and leads to constant shut down of factory.
As the problem confronting the manufacturing sector of Nigeria still lingers, it might not be surprising that global economic crisis has compounded the problems.
The study carried out an assessment of the profit of manufacturing firms in Nigeria. With regards to this, Guinness Nigeria Plc and Nigeria Brewery is used as the case study to ascertain the impact and expansion of manufacturing firms.
1.3 Research Questions
1. Is there relationship between corporate profitability and its determinant in the Nigeria manufacturing sector?
2. Does profitability have great impact in the Nigeria manufacturing sector?
3. How does corporate profitability affect the increase in production of goods/stocks?
1.4 Objectives of the Study
1. To determine the level of corporate profitability and its determinant in the Nigeria manufacturing sector.
2. To determine the factors (i.e. exchange rate and the degree of monopoly power) which influence movement of profitability.
3. To determine the relationship between profit/retention with investment which motivate an increase in production of goods/stock.
1.5 Statement of Hypotheses
Hypothesis is tentative statement which can either be provided right or wrong in a statistical test. However, it is divided as null hypothesis (H0) and alternative hypothesis (H1).
Therefore in order to solve this research problem, the following hypotheses shall be tested.
1. H0: There is no relationship between corporate profitability and its determinant in Nigeria manufacturing sector.
H1: There is a positive relationship between corporate profitability and its determinant in Nigeria manufacturing sector.
2. H0: There is no great impact of profitability in the Nigeria manufacturing sector.
H1: There is a great impact of profitability in the Nigeria manufacturing sector.
3. H0: There is no relationship between corporate profitability and the increase in production of goods/stock.
H1: There is a relationship between corporate profitability and the increase in production of goods/stock.
1.6 Significance of the Study
This study is an attempt to establish the relationship between corporate profitability and its determinant in the manufacturing sector of Nigeria and to ascertain what direction the impact has been on the manufacturing sector profit within the period under study.
Also to assist manufacturing firms that are facing challenges in profit maximization. A guide to stakeholders, infact industries, entrepreneurs as well as students studying business courses.
1.7 Scope of the Study
Due to time and data constraint that are anticipated, I limit this study to Guinness Nigeria Plc and Nigeria Brewery between the period 2009 – 2014.
1.8 Limitations of the Study
Any social research is inherently hindered and this is more so when such research is outside experimental studies. In the course of undertaking this research work, the researcher encounters a number of constraints.
First was the problem of non-cooperation from some officials of Guinness Nigeria Brewery and Nigeria Breweries in Benin City. Some of the personnel contacted for interview did not cooperate while some did reluctantly. The difficulty in getting access to official and up-to-date records and documents was also encountered.
Time was another great constraint as lecturers, course work and examination preparation were alongside with the writing of this research work.
1.9 Definition of Terms
Manufacturing: The process of converting raw materials component, or parts into finished goods that meets a customer’s expectations or specification. It involves the use of machines and manpower.
Profitability: The state or condition of yielding profit or gain. It is often measured by price to earnings ratio.
Profit: The surplus remaining after the total cost are deducted from total revenue and the basis on which tax is computed and dividend is paid.
Funds: A sum of money or other resources set aside for specific purpose.
Investment: The purchase of a financial product or other items of value with an expectation of favourable future returns. In general investment means the use of money in the hope of making more money.
Shareholder: In an individual or institution (including a corporation) that legally owns a share of stock in a public or private corporation.
Interest: A fee paid for the use of another party’s money. To the borrower, it is cost of rendering money.
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